Is There an Increased Opportunity to Evade Personal Tax Through Corporatization?
The upward revisions for personal tax were made on 23rd February 2015. These changes were subject to the top marginal income tax rate in the jubilee budget of Singapore. This announcement not only surprised the wealthy class Singaporeans, but the middle class and low-earning individuals were also left doomed.
After the revisions, it was expected that the companies would adopt strategies to avoid higher personal taxes. Due to the company’s flow of income to the affected individual, it will get subjected to corporate tax at the rate of 17%. In simpler words, the high earners would be able to shed their tax burden quickly.
People who used to earn at least $160,000 will have to fear taxes. In simpler words, they have to undergo a higher marginal tax rate from YA 2017.
Individuals and companies with a chargeable income above $320,000, have been slammed with the most significant increase. It is expected that the marginal tax rate for the stated tier would go up. It is going to apply for all the incomes earned in the year 2016.
Risks of Evading Taxes by Corporatization
There are numerous risks involved in evading personal taxes through corporatization. Considering this, the Senior Minister, Ms. Josephine Teo, had to take adequate steps. Ms. Teo commented that IRAS would take suitable audit measures, which will help in the effective monitoring of corporatization behaviour.
IRAS will also undertake strict measures against companies that are being set up to avoid personal income taxes. This will give them access to their personal income.
Many affected parties might get speculated on the lines of corporatization to avoid evading personal taxes. Although it is a legitimate means, they should be able to manage the tax liabilities so that they can prevent any fallout.
It should be brought to one’s kind notice that if IRAS gets any evidence regarding the incorporation with the motive to evade personal tax, then serious steps might be taken.
Although it is easy to incorporate a company with the motive to evade personal tax, it can inevitably end up with various litigations. Some signs show the lack of economic, commercial, and operational substance that can alarm the taxman.
Signs That Can Warn the Taxman
Below is a list of comprehensive warnings which are potential indicators to raise the alarm about tax litigation:
- Lack of substantial clients: Invoices play a significant role in unraveling the lack of commercial substance. The authorities will be checking the invoices and revenue patterns of the newly incorporated companies to find evidence. For example, a company’s top billing sales executive can set up an external sales agent to avoid personal tax. This type of new arrangement can definitely come in the eyes of IRAS, thus bringing new troubles for you and your company.
- Small team: If the newly incorporated company has zero or headcount, then it might come into the radar of IRAS. It is pretty easy to catch companies with such arrangements. CPF contributions play a significant role by serving as evidence for the above-stated purpose.
- Lack of expenses: If the business firm isn’t spending a proper amount of money running its business smoothly, then it is straightforward for IRAS to find out about the legitimacy of the business firm. If you are not paying any rent or utilities, then it is a visible sign that you are deliberately doing it to save personal taxes
- Single Recurring Transactions: False transactions are actually a give away to the IRAS. Ambiguous transactions between related parties help in providing evidence about the legitimacy of the enterprise. An excellent running business firm will have transactions with various parties, rather than just one party.
Why Should You Resort to a Private Limited Company?
Individuals under sole proprietorship, partnership, and LLP’s having an annual income of more than $160,000 will have to pay higher taxes from YA 2017. Individuals with expansion plans and handsome revenue can try to incorporate a private limited company if their income increases more than $160,000. However, they must have substantial proof of evidence to incorporate this business entity.
This will help in establishing that the former hasn’t incorporated the company to evade personal tax. Individuals prefer choosing sole proprietorship, partnership, and LLP to reduce compliance costs. It will not only help them in increasing their profitability. It is also crucial for other factors like diversification, better reputation, higher creditworthiness, and so on.
While undergoing incorporation of a new company so as to evade personal tax, it must be kept in mind that it should not be costlier than paying taxes. If incorporation is costlier than payable taxes, then what’s the use of undergoing so many processes. Sometimes it is smarter to pay excess taxes rather than getting devastated during the incorporation of a company.
Singapore has really created a tough nut for high money earning individuals. IRAS has made a tough nut for individuals who aspire to evade personal tax. Through IRAS, tax evaders can keep under check.
Taxes play an essential role in maintaining the economy. But there are legal ways to lessen your taxes. If you need help regarding this matter, you can always consult 3E Accounting.
As respectable withholding tax service providers, we’re more than willing to assist and advise you regarding your tax needs.